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In common law legal systems, a trust is a relationship in which a person or entity (the trustee) has legal control over certain property (the trust property or trust corpus), but is bound by a fiduciary duty to exercise that legal control for the benefit of someone else (the beneficiary), according to the terms of the trust and the law.
Thus, the trustee is said to hold legal title to the corpus, while the beneficiary holds equitable or beneficial title. If the legal and equitable title merges in the same person, the trust is considered nonexistent. This can happen when the trustee becomes the sole beneficiary.
In general
The trustee can be either a natural or a legal entity. There can be multiple trustees, in which case the trust should provide a mechanism for the trustees to make decisions. A trust will not fail solely for want of a trustee; if there is no trustee, whoever has title to the trust property will be considered the trustee. If the interests of the trust require it, a court of competent jurisdiction may appoint a trustee to ensure the continuing viability of the trust.
The trust property can be any form of property, be it real or personal, tangible or intangible. The beneficiary can be a single person, multiple persons, or a defined class or group of persons, including people not yet born at the time of the trust's creation. The trustee can be one of the beneficiaries, so long as the trustee is not the only beneficiary. A trust can also be created with some charitable purpose, as opposed to having a particular person or persons as its beneficiary.
The trust has been called the most innovative contribution of English legal thinking to the law. It plays an important role in all common law legal systems. Trusts developed out of the English law of equity which has no direct equivalent in civil law jurisdictions. However, since the use of the trust is so widespread, some civil law jurisdictions have incorporated trusts into their civil codes. Civil law systems also have analogous concepts like patrimony of affectation and the foundation that have similar independent patrimonies from their donors that trusts can have from their grantor.
Trusts are used for a number of purposes, including to plan one's estate and as a form of investment. They are also frequently used to reduce the amount of tax payable, since they often receive special tax treatment. Pension schemes are often set up as trusts.
Express, implied, and constructive trusts
Trusts can be classified in a number of ways. One of these ways is by how the trust was created. Most commonly, a classification of trusts as express trusts, implied trusts (resulting trust) and constructive trusts is used. Note however that this terminology is not accepted by all authors.
An express trust is created where one person (the settlor) conveys property to another (the trustee) on the condition that the property will be used for the benefit of a third party or parties (the beneficiaries). The intention of the parties to create the trust must be shown clearly by their language or conduct. For an express trust to exist, there must be certainty to the objects of the trust and the trust property. Statute of Frauds provisions require express trusts to be evidenced in writing if the trust property is above a certain value, or is real estate.
An implied trust (also called a resulting trust) is created where some of the legal requirements for an express trust are not met, but an intention on behalf of the parties to create a trust can be presumed to exist.
Unlike an express or implied trust, a constructive trust is not created by an agreement between a settlor and the trustee; rather a constructive trust is imposed on the trustee by the law. This generally arises due to some wrongdoing on behalf of the trustee, where the trustee has acquired legal title to some property but cannot in good conscience be allowed to benefit from it. For example, the Privy Council has held that if a fiduciary accepts bribes or makes an improper profit, a constructive trust is thereby created, by which the fiduciary holds the bribes or improper profit as trustee of a constructive trust for the benefit of the principal.
Simple or bare trusts versus special trusts
In a simple trust (also called a bare trust) the trustee has no active duty beyond conveying the property to the beneficiary at some future time determined by the trust. In a special trust, however, the trustee has active duties beyond this.
Private trusts versus public or charitable trusts
A private trust has one or more particular individuals as its beneficiary. By contrast, a public trust (also called a charitable trust) has some charitable end as its beneficiary. In order to qualify as a charitable trust, the trust must have as its object certain purposes such as alleviating poverty, providing education, carrying out some religious purpose, etc. The permissible objects are generally set out in legislation, but objects not explicitly set out may also be an object of a charitable trust, by analogy. Charitable trusts are entitled to special treatment under the law of trusts and also the law of taxation.
Fixed, discretionary and hybrid trusts
In a fixed trust, the amount of money or other goods or services to be paid to the beneficiaries is fixed by the settlor. An express fixed trust requires a certain degree of certainty regarding who are the beneficiaries and the amounts to be paid to them, so that the trustee has little or no discretion. If this degree of certainty is not met, an implied trust exists instead. In a discretionary trust, the amount of money or other goods or services to be paid to the beneficiaries is up to the trustee, so long as the decision is made based on the beneficiaries best interests. A hybrid trust combines elements of both fixed and discretionary trusts. In a hybrid trust, the trustee must pay a certain amount of the trust property to each beneficiary fixed by the settlor. But the trustee has discretion as to how any remaining trust property, once these fixed amounts have been paid out, is to be paid to the beneficiaries.
Specific types of trust: unit trusts, protective trusts
A unit trust is a trust where the beneficiaries (called unitholders) each possess a certain share (called a unitholding) and can direct the trustee to pay money to them out of the trust property according to the number of unitholdings they possess. Unit trusts are primarily used for investment purposes.
A protective trust is a type of trust that was devised for use in estate planning. Often a person, A, wishes to leave property to another person B. A however fears that the property might be claimed by creditors before A dies, and that therefore B would receive none of it. A could establish a trust with B as the beneficiary, but then A would not be entitled to use of the property before they died. Protective trusts were developed as a solution to this situation. A would establish a trust with both A and B as beneficiaries, with the trustee instructed to allow A use of the property until they died, and thereafter to allow its use to B. The property is then safe from being claimed by A's creditors, at least so long as the debt was entered into after the trust's establishment. This use of trusts is similar to life estates and remainders, and are frequently used as alternatives to them.
See also
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